The High Court revisits Pure Economic Loss: Brookfield Multiplex Limited v Owners Corporation Structure Plan [2014] HCA 36

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1 - MCW In Focus Insurance The High Court revisits Pure Economic Loss: Brookfield Multiplex Limited v Owners Corporation Structure Plan [2014] HCA 36 David Jesser - Insurance Brisbane - T E djesser@mcw.com.au March 19, 2015 The Facts In this matter the Owners of strata-titled serviced apartments in Chatswood New South Wales ( the Owners ) brought proceedings against Brookfield Multiplex Limited ( Brookfield ) contending that Brookfield was liable in negligence for breach of a duty to take reasonable care to avoid a reasonably foreseeable economic loss to the owners in having to make good the consequences of latent defects caused by the building s defective design and or construction. The Owner s argument was rejected at first instance but upheld by the New South Wales Court of Appeal. The builder then appealed to the High Court. In the High Court the builder successfully argued against liability being imposed for pure economic loss on the basis that:- 1. Its tortious obligation to subsequent owners should not exceed the builder s obligations to the developer; 2. Dispensing with the need for an equivalent liability on the builders part to the developer, for whom it built the complex, would reduce the law to incoherence, in that, in relation to defects in the quality of construction, a builder of a building may find itself potentially liable in tort to every subsequent owner of the building and yet not be liable to the party for whom the building was originally constructed; 3. The contracts pursuant to which the owners of apartments acquired their rights in the common property afforded such owners sufficient protection against the risk of economic loss attributable to defects in construction and the owners were not relevantly vulnerable to the builder in that respect. Page 1 of 5

2 The Law Justices Crennan, Bell and Keane wrote the leading judgment in the matter. They determined that it was of critical importance that the loss for which the owners sought damages was truly categorised as pure economic loss. The owner s claim was based on the failure of the purchasers of the apartments to get value for money from the developer rather than the builders causing damage to the owner s property. They noted at paragraph 67 that:- One difficulty with the [owner s claim] is that the [owner] itself paid nothing for the common property: it suffered no "loss" arising out of the acquisition of the common property. And to say that the common property, for which it paid nothing, is less valuable to it by the amount which it must expend to repair it, is distinctly not to show that any act or omission on the part of the [builder] caused the [owner s] assets to be diminished. The Court referred to the decision of Robinson v P E Jones (Contractors) Ltd [2012] QB 44 at where it was held:- I do not think that a client has a cause of action in tort against his negligent accountant or solicitor simply because the accountant or solicitors advice is incorrect (and therefore worth less than the fee paid by the client). The client does have a cause of action in tort if the advices relied upon by the client with the result that his assets are diminished. Further, the court said at paragraph 69:- This Court s decision in Bryan v Moloney does not sustain a proposition that a builder that breaches his contractual obligations to the first owner of the builder is to be held responsible for the consequences of what is really a bad bargain made by the subsequent purchasers of the building. To impose upon a defendant builder a greater liability for a disappointed purchaser, then to the party for whom the building was made and by whom the defendant was paid for its work would reduce the common law to incoherence. Moreover, to hold that a subsequent purchaser of a building is vulnerable to the builder so far as the risk of making an unfavourable bargain for its acquisition is concerned, would involve a departure from what was held by this court in Woolcock Street Investments. As to the builder s argument that its obligations were so comprehensively stated in the design and construct contract that there was no room for imposition by the law of tort of a concurrent duty of care to the developer the High Court referred favourably to the decision the Supreme Court of the Page 2 of 5

3 United States in East River Steam Ship Corp v Trans America Delavale [1986] USSC130. There the court said:- The failure of the purchaser to receive the benefit of its bargain [is] traditionally the core concern of contract law. As to the owner s attempts to rely on the High Court decision in Voli v Inglewood Shire Council (1963) 110 CLR74, the Court said that case established that the builder may have been liable for damages for physical injuries to third parties resulting from defective work before and during the course of its contract with the developer but the owner s argument in that regard failed to observe the crucial distinction between physical injury and economic loss. Under the common law the former was protected by law when the latter is not. The court reiterated at paragraph 124 that:- A cause of action in negligence does not arise unless and until the plaintiff suffered damage. Damage is the gist of the action in negligence. Further, at paragraph 125 the court said:- Quite apart from the judicial common law approach reflected the maximum caveat emptor the loss incurred by a purchaser of a building who it turns out has paid more for the building than it should have, was significantly different from the liability in the owner to third parties who have suffered personal injury or damage to their property as a result of the defect in the building. An owner who is or presumably should be aware of defect in the building may incur liability to third parties injured by the defect cause the owner decided not to incur the expense of repairing the defect in the building. The decision which attracts that liability will not usually be one to which the negligent builder has contributed. On the issue of vulnerability, French CJ stated at paragraph 22:- Abstracting the reference to proximity in Brian v Moloney, the decision adverted to factors adverse to the recognition of a duty of care for pure economic loss other than in special cases. The adverse to special cases would commonly but not necessarily, involve an identified element of known reliance or dependence on the part of a Plaintiff or the assumption or responsibility by the Defendant, or a combination of the two. The contract between the prior owner and the builder in that case was non detailed and contained no exclusion or limitation of liability. The subsequent owner would ordinarily be unskilled in building matters and inexperienced in the niceties of real property investments. Any builder should be aware that such a subsequent owner would be likely to assume that the building had been competently built and the footings were adequate. These considerations may be seen as elements of the notion of vulnerability which has become an important consideration Page 3 of 5

4 in determining the existence of the duty of care for pure economic loss. In this context, it refers to the plaintiff s incapacity or limited capacity to take steps to protect itself from economic loss arising out of the defendant s conduct. As such the court determined at paragraph 34 that:- This is not a case in which, for the purposes of the subsistence of a duty of care, the subsequent owners could be regarded as vulnerable. Nor, therefore, could the Corporation as their statutory "agent". The position of the subsequent owners and the interaction of the contractual and statutory frameworks are antithetical to the proposition that Brookfield owed the Corporation the duty of care found to exist by the Court of Appeal. Again that background, the relationship between Brookfield and the Corporation is not analogous to the relationship in Bryan v Maloney between the builder of a dwelling house and the downstream, arms-length purchaser of the house, who suffered economic loss by reason of latent defects in the construction. It is analogous, although not identical, to the position of the purchaser of the complex in Woolcock. As a result it was determined that there was no duty of care in respect of pure economic loss flowing from latent defects owed by Brookfield to the owners. CONCLUSION Justice Gageler perhaps expressed the policy rationale underlying the High Court s decision best when he said at paragraph 185:- The continuing authority of Bryan v Maloney should be confined to a category of case in which the building is a dwelling house and in which the subsequent owner can be shown by evidence to fall within a class of persons incapable of protecting themselves from the consequences of the builder s want of reasonable care. Outside that category of case, it should now be acknowledged that a builder has no duty in tort to exercise reasonable care, in the execution of building work, to avoid a subsequent owner incurring the cost of repairing latent defects in the building. That is because, by virtue of the freedom they have to choose the price and non-price terms on which they are prepared to contract to purchase, there is no reason to consider that subsequent owners cannot ordinarily be expected to be able to protect themselves against incurring economic loss of that nature. Further, it was noted that the actual decision in Bryan v Maloney had been overtaken at least to Page 4 of 5

5 the significant extent by various statutory forms of protection for those purchasing dwelling houses which turned out to be defective. If legal protection was to be now extended it was best done by legislative extension of those statutory forms of protection. Therefore it would seem that the High Court has chosen to not to expand the category of defendants who may bring a claim for pure economic loss. Considerations of vulnerability in the sense of inability to protect yourself in contract seems to now loom large in any consideration as whether liability will be imposed to pure economic loss. Contact the article author for more info David Jesser Insurance Brisbane T E djesser@mcw.com.au Page 5 of 5